Essays on Corporate Finance

This dissertation consists of three essays, each of them addresses an important research question in corporate governance. The first essay, entitled "Zombie Board: Board Tenure and Firm Performance", examines how the tenure of board members affects the monitoring and advising capacities of the board. Board tenure is one aspect of board structure that has been largely ignored in prior studies. This paper fills in this gap in the literature by showing the board tenure affects firm performance and corporate decisions. Specifically, I show that board tenure exhibits an inverted U-shaped relation with firm value. The value and quality of corporate decisions such as M&A, financial reporting quality, CEO compensation and replacement, and innovation also depend non-linearly on board tenure. The results are consistent with directors' on-the-job learning improving firm value up to some threshold, at which point entrenchment dominates and firm value suffers. The paper further shows that the inverted U-shaped relation remains even when holding board composition constant, suggesting that the benefits and costs of learning and entrenchment (above and beyond those driven by changes in board composition) change over time and hence affect firm decisions and performance.;The second essay of his dissertation, entitled "Do Firms Hedge Optimally? Evidence from an Exogenous Governance Change" (co-authored with Urs Peyer and Benjamin Segal), aims to shed some light on how board independence affects risk management practices of firms. We find that an exogenously imposed board composition change significantly affected financial risk management. Using new proxies for the extent of financial risk management in non-financial firms we find that treated firms (those affected by the requirement to have a majority independent board) reduce their financial hedging in a difference-in-difference framework. The reduction is concentrated in firms with higher conflicts of interests factors, such as a high CEO equity ownership level, which exposes CEOs to more idiosyncratic risk, or a higher occurrence of option backdating. We reject the hypothesis that newly independent boards reduce financial hedging due to a lack of knowledge. First, we find no difference in financial hedging for firms where SOX mandated the addition of a financial expert relative to those that already had such expertise. Second, shareholder value increases more during the period of time of the listing rule deliberations for treated firms that hedge prior to the treatment. We conclude that some firms hedge excessively, reducing shareholder value--potentially to the benefit of under-diversified CEOs. Our findings also suggest that the board plays a significant monitoring role in financial risk management.;The third essay of this dissertation, entitled "Accounting Choice around a Change in Fiduciary Duty" (co-authored with Daniel Bens), examines how shareholders-bondholders conflicts affect accounting choices. We examine management's choice of several accounting accruals following an exogenous event that more closely aligned their fiduciary duty to both shareholders and creditors. We build on the work of Becker and Stromberg (2012) who study the change in investment behavior of Delaware incorporated firms following a 1991 legal ruling that set a precedent that firms nearing financial distress (but not in bankruptcy) owe a higher standard of duty to creditors. Becker and Stromberg demonstrate that this leads to a reduction in behaviors that are indicators of classic equity-bondholder conflicts. We ask whether this legal ruling also affects financial reporting behavior. Specifically, as managers view their duties to these different finance providers as more aligned, do they alter their accounting choices as well? Using a differences-in-differences research design, we examine a series of accounting choices and provide evidence that companies affected by the ruling report more conservatively. This result holds after controlling for the fundamental changes in investing decisions documented by Becker and Stromberg (2012). Our results suggest that the incentive to use accounting discretion to exploit bondholders at the expense of shareholders declines when the nature of the governance relationship is exogenously changed to require managers to be more responsible to both parties. (Abstract shortened by UMI.).